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Avoided Deforestation

May 08, 2011

Leading financial institutions upped the ante on their future role in mitigating climate change as they called for more effective forest-carbon regulations during a United Nations report launch in London Friday, just months ahead of an international climate change meeting to be held in South Africa.

Banking, insurance and investment representatives at the event welcomed the findings of the new study, REDDy - Set - Grow: Opportunities and roles of financial institutions in forest-carbon markets, which stresses that the financial sector must step up its engagement in the emerging green market, and makes the case for its improved regulation to facilitate this.

Offers of cooperation by financial representatives at the event to work with their national and international regulators mark a turning point in efforts to get the forest carbon credit market off the ground, only months ahead of United Nations Framework Convention on Climate Change (UNFCCC) climate change talks that will possibly lead to a new mechanism to reduce deforestation and forest degradation, known as REDD+. In order to protect forests, a private carbon credit market is essential.

"The market for forestry carbon has significant potential but will require concerted efforts in the design phase by policy-makers to ensure that it attracts flows of private capital. Because of the ability for sustainable forestry projects to deliver not just carbon but also biodiversity and community benefits, financial institutions stand ready to work with governments to help ensure the full potential is realised," said Abyd Karmali, Managing Director and Global Head of Carbon Markets at the Bank of America Merrill Lynch, during the press conference, which was held at the banks' European headquarters in London.

Governments successfully agreed in Cancun last December to making REDD+ a core component of the next global regime on climate change. To date, this has been carried forward by UNEP, the UN Development Programme and the Food and Agricultural Organization, with parallel and supportive work by the World Bank. However, the question of how this global mechanism will be implemented and financed remains unresolved, and will be a critical subject of future UN climate convention negotiations - including upcoming talks in Durban, South Africa.

The commitment of the private sector and financial institutions toward the implementation of REDD+ is crucial, the UNEP Finance Initiative (UNEP FI) study says, since the overall investment needed for implementation of REDD+ activities appears to exceed public capabilities and will thus largely hinge on action from the private sector.

"It is critical to build a constructive dialogue between the public sector and the private sector so that private capital can be deployed efficiently and quickly into financing REDD+ activities," Christian del Valle of BNP Paribas said. "The UNEP FI report clearly shows the way to implement this."

Previous research has established that a 50 per cent reduction in deforestation is needed by 2030 if the forestry sector is to support global efforts aimed at holding the global temperature rise to below 2 degrees Celsius, the global climate target the world's governments have set themselves in the international climate change agreements of the UNFCCC.

Achieving this reduction will require investment previously estimated at US$17 - US$33 billion per year, according to UNEP.

The report stresses how private sector participation in REDD+ and deforestation activities can lead to a win-win scenario for the finance sector and governments, since such projects can translate into both lucrative investment opportunities and cost-effective strategies to abate carbon emissions and protect biodiversity and livelihoods.

The forestry-based carbon market's value holds the potential to grow to US$10+ billion by 2020, according to The Economics of Ecosystem and Biodiversity (TEEB), while that of total forest ecosystem goods and services is estimated at US$5 trillion. This massive potential has, however, largely been left untapped so far, with low confidence levels from investors resulting from an insufficient and ineffective national and international regulatory framework.

Armin Sandhoevel, Allianz Climate Solution, said: "Allianz believes in the utmost relevance of forest-related projects such as REDD+, alongside with Programme of Activity (PoA) and small scale renewable energy projects, because they offer an outstanding value to the protection of biodiversity and to climate change mitigation by combining a wide array of activities into one project. But in order for the private investors to fully mobilize around REDD+ activities, we feel that some issues must be addressed. Credits derived from avoided deforestation projects need to be part of compliance schemes, and the projects need a robust domestic legal framework that allows investors to get involved with a long term perspective. Moreover reliable and rigorous standards for carbon credits derived from avoided deforestation are a pre-condition for long term price estimates, which are crucial for investors. We think UNEP FI is the adequate platform to talk to decision makers on how the REDD+ mechanisms can potentially be improved and, by extension, how future growth of investments in forest-related projects can be encouraged."

Finance sector attendees at the event saluted the report as the first step of a critical learning process that will not only sharpen their competitive edge, but also boost their role in shaping tomorrow's green economy.

"It is unwise in this day and age for companies that wish to remain competitive to turn a blind eye to emerging green markets such as the forest-carbon market. This is a rationale that makes sense from a sustainability perspective, but also from a profitability one," said Richard Burrett, partner at Earth Capital Partners LLP and Co-chair of UNEP FI.

A follow-up report of REDDy - Set - Grow specifically geared for policy-makers and containing recommendations on the design of forest-carbon policies will be released in June.

Financial institutions at the event were gathered by UNEP FI, a public-private partnership that has set the sustainable finance and responsible investment agenda for more than two decades and counts close to 200 members on all continents in the fields of investment, banking and insurance.

May 03, 2009

The suggestion that trees should be industry's best friends under a new climate change or cap and trade program being considered by Congress, seems absurd at first. Forests do not initially appear to most people to be a source of the problem when it comes to anthropogenic greenhouse gas emissions. We generally think of planting trees as a local, individualized step to attempt to remove emissions from the atmosphere. Often we think of tree planting as a symbolic rather than a substantive or significant action to reduce climate change. Forests, however, are in fact a significant storing house for carbon and when burned, release a large amount of carbon dioxide and other greenhouse gases into the atmosphere.

Forests provide the low-cost approach for the first tranche in anthropogenic greenhouse gas reductions as we seek the "low hanging fruit" of these reductions. Forest preservation and regrowth provide the potential for the larger-volume and lower-cost source of greenhouse gas reductions and offsets for greenhouse gas emissions. As carbon capture and storage by which CO2 from coal-fired power plants and other sources is injected underground for long-term storage takes several years to bring on line, Reduced Emission from Deforestation and Degradation (REDD) can serve to make a significant step toward emissions to be achieved by 2020 being discussed in Congress for a US climate change and cap and trade program, and in terms of international negotiations for a tray to follow the Kyoto Protocol.

The size of the emissions from forest destruction usually is startling. It is in gross and relative terms rather astounding. The destruction of forests actually accounts for somewhere between 17 and 22 percent of human greenhouse gas emissions. Thus, controlling the greenhouse gas emissions from deforestation is critical to any global plan to reduce climate change, particularly in the first few years as costlier reductions can be developed over the next decade, and perhaps ways to reduce those costs.

A second aspect of deforestation relates to the areas that have already been lost or significantly degraded. For example, farmland that was previously what we call “primary forest” or forest that existed in its natural state prior to being deforested or degraded. In these areas, opportunities exist for reforesting the land through tree planting. Two types of reforestation are possible. First, the forest can be replanted with native species that would have been present prior to the destruction of the forests. The second involves the planting of non-native species or otherwise planting for the purpose of harvesting some or all of the trees. The second approach has the goal of using trees to absorb or sequester CO2 , and then using the harvested wood in ways that maintain the carbon in building or other products for a long time.

In understanding the challenges of private development of forest carbon projects, it is important to comprehend the issues of these projects. First let us consider avoided deforestation projects. One of the first issues is simply measuring the amount of carbon in the forests that would be released if destroyed. There are certain protocols that can be used now developed by the Voluntary Carbon Standard (VCS), which has become the main standard setting organization for forest-related offset projects.

Another issue is the question of permanence. For growing forests a significant risk is permanence, that is, to what extent will the forest will be preserved over a very long period, as opposed to short term preservation with destruction to follow. If the forest is logged or it burns or dies from disease, then the carbon sequestered in the trees, plant life, and soil, will be largely emitted to the atmosphere and future sequestration of carbon dioxide will not occur. The carbon credits that are generated would be without substance if after five years the forest is destroyed. Forestry projects are largely long-term projects, lasting 20 to 100 years in most cases. Parties must show the registration entity and the verifiers that review the Project Design Document that the forest will not be cut down, burned, or harvested within the relevant project period. One approach used by the VCS to address permanence concerns is to hold back a percentage of the verified credits and to release them back over time, say the 30-year life of the project, to the project developer.

One of the other major concern for forest projects is leakage. For forest projects, leakage involves the question of whether the reduction in deforestation or degradation in one are simply moves that activity to a nearby property or a significant distance away. As an illustration, burning forests for soy bean farming, which is such a significant problem in Brazil, moves from one part of a state in a country where actions have been taken to stop such burning to another area in that state or to an altogether different state. Measuring and addressing these issues is required by the VCS.

Though the real game right now for REDD and reforestation projects lies with the VCS and voluntary carbon credits, it appears fairly clear that forest carbon projects will play a role and be large part of future US federal legislation and already has been accepted as an offset mechanisms in the California climate change regulatory system and will likely be part of the three multi-state climate change regulatory programs that are evolving and will go into effect even if Congress does not act to pass climate change legislation. The discussions at the international level appear to be moving toward accepting forest-based offset credits.

The greenhouse gas emissions from forest destruction are so massive, that we cannot avoid taking on the need to reduce this destruction dramatically. More and more major greenhouse gas emitters in the United States are beginning to review this opportunity and to look at investing in project-based REDD opportunities. The thinking is that investment in a project or entering into emission reduction purchase agreements that allow a company to have a right to purchase REDD credits once approved and verified, provides a good hedging mechanism for future offset prices. More and more of our clients are looking at both domestic and international forest carbon projects either as project developers or as investors to ensure that they take advantage of the opportunities that forest carbon projects provide. Ironically, utilities and oil and gas companies may find that trees are truly their best friends when it comes to addressing the first few years of a cap and trade system in the United States.

September 22, 2008

The European Union is poised to consider forest-based carbon credits or emission offsets. The European Parliament’s Environment Committee’s review of the EU Emissions Trading Scheme (ETS) is scheduled to discuss the inclusion of forest-related credits on October 7, 2008.

Several Non-Governmental Organizations (NGOs) are lobbying for inclusion of forest-based credits in the greenhouse gas control schemes. The Rainforest Alliance and the Climate, Community, and Biodiversity Alliance provide verification and validation of forest-based carbon credits.

The United Nations is evaluating including avoided deforestation in the Clean Devlopment Mechanism under the Kyoto Protocol. In the United States, several developing state programs would include forests and agriculture as land-based emission offsets. The Lieberman-Warner bill that was ultimately filibustered in the Senate, included provisions allowing forest-based offset credits.

If the EU would accept these credits and the UN would approve methologies for obtaining Certified Emission Reductions under the Kyoto Protocol, this would be a major supporting step. Now, voluntary emissions reductions (VERs) can be obtained by, for example, seeking credits under the Voluntary Carbon Standard (VCS).

Carbon credits for avoided deforestation present a means, along with other actions, to help reduce the destruction of our remaining rainforests.